Trump hands Japan great chance to escape deflation: Economist

The Trump presidency could set the right conditions for Japan to finally break free of the deflation that has hamstrung its economy for 15 years, according to a leading economist.

Dr Motoshige Itoh, a member of Japan's Council on Economic and Fiscal Policy, said at a forum here yesterday: "Whether you like it or not, Mr Trump has provided a very big opportunity for Japan to accelerate the process of its departure from deflation."

He noted that long-term interest rates in both the United States and Japan have drifted upwards since Mr Trump became the US President-elect last month.

The trend was evident even before the US Federal Reserve formally raised its benchmark rate on Wednesday - a reflection of market confidence that Mr Trump will increase spending and ignite the economy.

Dr Itoh, who is also Professor Emeritus at the University of Tokyo, said: "The US may be moving towards a larger fiscal deficit; that is very stimulating for the economy, and a major economic indicator - long-term interest rates - is responding to this change. This could provide a very big opportunity for Japan."

This is especially so, he added, because the Bank of Japan's quantitative easing strategy was successful but "you can't keep buying government bonds forever".

Dr Itoh also laid out other cases for investing in Japan.

Corporate profitability has increased under Abenomics - Prime Minister Shinzo Abe's spend-for- growth policy - and many Japanese companies are now at their highest-ever levels of profitability, based on a ratio of profit to sales, he said.

And while US populism has killed the massive Trans-Pacific Partnership (TPP) trade deal, the blow is not as dramatic as it seems, he reasoned: "Although TPP is now a problem, TPP is a forward-looking project, so the present state of US-Japan economic relations is not affected a lot by this trend.

"The fiscal expansion of the US is actually benefiting Japan a lot."

He did, however, flag that one possible concern about the upcoming US government is that Mr Trump often singles out individual companies for criticism.

"So far, nothing has happened to Japanese companies, but we had a history of a very difficult trade war in the 1980s, so we have to be very careful," said Dr Itoh.

The forum was organised by the Japan External Trade Organisation and Japan Embassy.

A version of this article appeared in the print edition of The Straits Times on December 16, 2016, with the headline 'Trump hands Japan great chance to escape deflation: Economist'. Print Edition | Subscribe